Making Progress

One of the payoffs of recent developments is that the government’s economic management task no longer is narrowly conceived as consisting of making fiscal and monetary policy, and keeping channels open for free trade. In recent years, innovation policy has muscled onto the center stage as well.

For those who like to follow these matters up close and personal, the most recent event is the appearance this week of William Baumol’s book-length survey of the literature of industrial organization and economic growth, The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism.

Baumol, born in 1922, is an especially well-respected but relatively little-known member of economics’ “greatest generation” — those who in the 1940s and ’50s translated the analytical tools of economics into mathematical language and fashioned them into as coherent whole.

Baumol even could be called “little-remembered” in some circles, given that he served as president of the American Economic Association as long ago as 1981. A sculptor and actor and student of the arts, he could have closed down entirely his dual appointments at Princeton and New York Universities.

Instead he has remained a vigorous contributor to the re-energized debate about the nature and causes of the wealth of nations, thanks to his landmark 1986 study (with Sue Anne Batey Blackman and Edward Wolff) Productivity and American Leadership: The Long View. That study ventured that reports of US economic decline had been greatly exaggerated.

The Free-Market Innovation Machine isn’t that mythical beast, the one-time book about growth that businessfolk and lay persons can read with pleasure. But it is a wise commentary on what has changed since Baumol’s youth, when Karl Marx and Joseph Schumpeter were virtually the only economists who could be said to have built innovation into their systems.

It also demonstrates how far professional economists have come from the 1970s, when books like The Incredible Bread Machine and The Vital Few were all the more support that could be found for those who considered that innovation policy to be the real key to managing a vigorous capitalist economy.

For those interested in the issues on the table today, however, a meeting on innovation policy and the economy in Washington D.C. last week was the place to be. It was the third such annual briefing by leading research economists to be sponsored by the National Bureau of Economic Research. The room was full of boffins from Capitol Hill and various science-lobbying organizations.

Josh Lerner and Paul Gompers of the Harvard Business School cautioned against a knee-jerk response to recent expressions of alarm about a venture capital bust. After all, the business is notoriously cyclical, they said. Better the government should work on enhancing the demand for venture funding rather than seeking to increase the supply. Measures like the Bayh-Dole Act of 1980 and the Federal Technology Transfer Act of 1986 had been strikingly successful in creating new opportunities, by easing entrepreneurs’ access to the latest advances in knowledge. Periodic capital gains tax cuts seem to have helped as well.

Dennis Carlton and Rob Gertler of the University of Chicago explained how emerging doctrines of intellectual property increasingly are colliding with old-fashioned antitrust law, with still-to-be-determined results. Such collisions are at the heart of the Microsoft case, with its crucial distinction between open systems and closed. One body of law creates market power in order to reward innovation; the other seeks to constrain it. The ins and outs of innovation-based competition are a long way from being thoroughly and widely understood.

Federal support for R&D in the antiterrorism era isn’t likely to change very much, according to Stanford’s Roger Noll, an expert of the distributive politics that underlie “the technology pork barrel” that he (and Linda Cohen) identified in the early ’90s. An upswing in federal R&D from its post-Cold War lows was well underway long before the events of 9/11. Both defense and non-defense spending were growing again. Indeed, if a serious anti-terrorism effect does materialize, probably its effect would be negative. Spending on R&D of all kinds fell during the Vietnam War, for example. There were too many superior claims.

Third World development was the topic of Jeffrey Sachs’ talk. The world’s best-know economic clinician made a strong case for targeting the institutions of technology transfer. Even the poorest countries need good universities to tailor the tools of modernity to their often-inhospitable local terrain, he said.

But perhaps the most interesting paper of all had to do with a proposal to make pharmaceutical products more widely available in poor countries, without diminishing big drug companies’ incentives to innovate. Jean O. Lanjouw, of Yale University and the Center for Global Development, noted the widespread antagonism to the routine extension of full intellectual property rights that accompanied the establishment of the World Trade Organization at the end of the Uruguay Round of trade negotiations. A more acceptable system has to be found if global comity is to be maintained, she said.

Lanjouw proposed a differential pricing scheme whereby patent holders on medicines for global diseases would have to chose between being protected in rich countries, or in poor countries, but not both. Protection in the huge markets in industrial nations would provide incentives to new drug development for cancer, for instance, but their benefits would diffuse quickly to the rest of the world. Patents for medicines intended for non-global diseases (malaria, for example) would be allowed protection world-wide.

Such is the flavor of what is going on in one of economics’ hottest fields. There is plenty here to keep reformers busy for many years to come.